Problematic business relationships


This is the first part of a series about British IT. Posts will range from “generic” to “personal” ones. Please note that there is no attempt to be academical, just document what has been observed by someone who started as an outsider hence conventional wisdom was something new.

This post is about what I would call “consultancy mentality” and how I believe holds back UK’s IT industry and in many times kills it’s businesses. Before publishing it a friend introduced me to the “elephants vs deers vs rabbits” hunting analogy, which is discussed later.

Two observations about British IT businesses.

  1. Every UK based IT business has a tendency to do a little bit of consulting.
  2. Because of entropy and (1) most British IT businesses end up becoming consultancies.

This has two important side-effects:

  1. Businesses and models are not shielded from disruption, and
  2. It poisons the internal structure of the companies.

In a similar approach with the other two articles on this series, I will mix some personal experiences, with results from observations, research and discussions that they triggered. At the end I will give my answer on the roots of the issue and why I think it is really bad.

Facing outwards

Before migrating to UK, I had two sources of theoretical knowledge about running an IT business: The first was from University where there were many classes about micro-economics and finance as it was a financial university with a computer science department. The other source was in the likes of “Founders at work” or relevant literature mostly originating from Silicon Valley veterans usually about their companies early stage.

Being in London I had the chance to attend three courses/seminars about IT startups, which was my area of interest. Only one was actually oriented around the subject, Accelerator Academy. The other two were about “Starting up”, with me believing that the difference between the two was well defined in the last 10 years What impressed me in the two conventional ones was a presentation of a business version projection of the Maslow pyramid of needs.

As in the original pyramid there is the need for food and shelter at the bottom, on the business version there was the accumulation of resources: mining, agriculture, oil drilling etc. Moving up we had utilities then services, with full customized solutions on the top. The higher you are positioned as a business in the business versions pyramid, the higher are your expected margins. Similarly being closer to the bottom equals progressively lower margins. A question that come up was why would someone want to be in the bottom of the pyramid? Two answers where provided: No other available option, or that the higher sales volume on the bottom substitutes for the lower margin). According to the narrative you always want to get “higher”, which is where the highest margins are.

This approach is also projected to IT based businesses. No matter how a business is arranged it should have a consultancy element: It should discover a number of wealthy clients with very specific needs and establish a business relationship with a constant cash flow: serve their needs and suck their cash. A way to imagine, we were told, would be line a pump that steadily pumps money from a small number of clients to the IT company.

Another element before we discuss the implications of the above further is the size of the country: Comparing with different countries significantly larger such as USA or China, UK’s size can sustain a managerial mono-culture., as it happens with many other European countries. Speaking about IT we know that there are different approaches about it in Silicon Valley (innovation) versus say New York (Finance) or Texas. Britain’s size allows a mono-culture in managers, so there might be few places where the discussion is towards generating volume or satisfying the lower margins, or more consumer facing IT.

Back to our story, I remember that while on the first startup, a mentor had told us that the fact that we were building a “generic” product, should be viewed mostly as a good door opener for starting discussions on selling consulting services around it. Our obsession with a software as a service model was a mistake. Instead we should “find that big client X that needs very specific features just for them”. I could not but subconsciously compare that with the blog posts of 37 signals who took the other route, getting out of consulting as their products were building momentum. Something was not making sense.

Another thing that also did not make sense was that although major advancements in computer science were happening from Britons such as Alan Turing or Tim Berners-Lee, their commercialization and profit was generated elsewhere. Why is this the case? Now I am pretty confident it happens because of the above…

I tend to believe that the popular narrative defies the specifics of software as a concept as well as the theory of margins explained in Kristensen’s “Innovators Dilemma” . Beginning from the latter it is easier to disposition companies placed in the higher margin by disrupting them from ones positioned lower. Reason has to do with economies of scale which can create strides in quality. This is accelerated on the software field where the additional unit has the margin cost of zero: 1 million extra searches per day do not cost Google anything significant. This becomes even more brutal on the era of web and mobile applications, because of the absence of physical media. As an illustrative example, let’s consider selling books: Suppose that someone, chasing the high margins was selling something like medical school textbooks. Now suppose that another company was trying to sell to lower margins, like say computer science textbooks but was targeting on volume, which is what Amazon did. After some years Amazon would have to build a logistics network, a web infrastructure that could cope with high volume of visitors etc. After some time, it would be far more easier to assemble a team of specialists and ask them to extend their operations to selling medical textbooks, by utilizing their existing network and resources. That’s far more easier than our imaginary high margin company trying to sell other stuff in order to survive. One can think of or remember many other similar examples, almost nobody remembers that company that was selling medical text-books on-line.

Ending the prolonged introduction: positioning your software company as a consultancy is something that can easily kill it. But also this seems to be the preferred option for UK businesses… but why?

Inwards

After discussing the issues of the consulting approach towards the marketplace and competition, let’s look how this affects companies internal structuring . Looking inwards I have observed that what is considered important is not that much what is related with the final product or service or activities related to production. What is considered important is satisfying the richest customer as soon as possible. Hence the spotlight is constantly reserved for client-facing functions, with the rest (functions, people, departments) being marginalized as second class citizens.

Some companies take this approach to the next level treating their whole operations as an expense. Example: We don’t need to have developers in our software company, we can outsource the function and keep only a product owner who would know the history of the project. Only the relationship with the paying clients is necessary the rest are expenses. Imagine yourself as a developer or graphic designer or system administrator in a company like this. You work hard in order to create or enhance a product or a service and the moment it starts generating profits, you become an expense. It’s like working so that you can become unemployed.

This also impacts the overall quality of the product. I have seen many times project managers or stakeholders running mad demanding “this little hack” that provides some functionality or just tweaks that their big cash-fat clients say, but not necessarily need. Soon product architecture ends up becoming a Frankenstein monster. After some point the effort of maintaining those hacks acts as weight making changes progressively more difficult and expensive. Then the cost-savvy people suggest outsourcing, which brings us back to last argument. (Outsourcing shops do not complain if their assignments are meaningless, moreover foreign ones). For a discussion of the above in the advertising industry please read: “Why Talented Creatives Are Leaving Your Shitty Agency”.

Consider how the above contradicts with companies in the likes of Microsoft and Paypal or even smaller ones such as GoCardless or Moo, where each additional client’s additional importance is small or can even be neglected. Would those companies prioritize things differently? How would they allocate resources or investments? Would they prefer to improve only existing client relationships or improve their offerings as much as possible creating a big barrier of entry for competitors and acquiring more clients?

An analogy describing the above came up while watching the movie “Kingsman”. It seems that the British IT industry is geared towards sewing custom made suits for the person on the left of the picture, while purposefully neglecting to make jackets for the person on the right.

Picture from: http://www.foxmovies.com/movies/kingsman-the-secret-service)[http://www.foxmovies.com/movies/kingsman-the-secret-service

Elephants, Deer and Rabbits analogy

I was not aware that the above points had been discussed in a slightly different context. While the cute image is from “Five ways to build a $100 million business”, it seems that the original post is the “Elephants, Deer and Rabbits — Some thoughts on start-up segmentation” from Mark Suster. A strong but true and honest statement is being made:

“We started out with such big dreams about changing the world. On some level we felt we did because being a SaaS company in 1999 was trailblazing. But in the end we ended up building esoteric features that we knew our clients would never use because they paid us lots of money. See definition of a whore.”

Because there is some resemblance on the posts topic, I’d say that using the same analogy, companies are positioning themselves to the “elephants only please” category. If I was allowed I would say “mammoth” oriented (one level above the elephant).

An (initially) outsider’s view

This is my root cause analysis of the situation. Coming originally from a classless society, I was surprised to find out different structuring of society and affairs. Now having this experience, I believe that one reason for chasing the highest margins is something that could be summarized as “take care of the richest person in the room” approach. While in other places, without this approach, it suits more to supply to the bottom of the income pyramid first and then move upwards. The logical steps would be:

High Margin → Needs of the few → consultancy approach

while on the other hand:

Volume → Needs of the many → Products or services.

Paradoxically this counter intuitive approach initially works: Because of the size of the country the critical mass of people plus funds which would support this approach exists. So a company can start and do well, at least for some time. Then it will almost deterministic reach a plateau, where it will be ripe for disruption from a Silicon Valley style company, be it foreign or local — it does not matter. That is what happens on macro-economical level.

Inside the company’s microcosm, in the micro level, we have the “demoralization of the troops”, the people that actually create wealth are not as much important as the customer facing yes-men (consultants), moreover they are treated as necessary evil / expense and that makes them sad, unproductive and disloyal, rightfully so it seems.

Next one: “The Kiske field”.

Cover: https://www.flickr.com/photos/kumipallomaa/9579034798, from Pate-keetongu.